Variable Annuities Pros and Cons

Variable annuities can be an ideal investment option for some, but they are not for everyone. Variable annuities pros and cons are diverse and debatable. When they were first introduced in the 1980s, there was no real way to weigh in on the advantages and disadvantages of the investment. However, after 30 years of performance and study, an in depth look is now possible.

The Pros of Variable Annuities

When looking at variable annuities pros and cons, one is keen to focus first on the positive aspects of the investment. There is certainly no shortage of them either. Variable annuities offer many advantages over other types of retirement investment accounts such as:

• The ability to accumulate tax deferred. True, this is a benefit found with virtually any type annuity, but it is advantageous over other investment accounts such as money market accounts because it allows the earnings to accumulate at a faster rate.
• Protection from liability lawsuits. The level of protection varies from state to state, but many areas protect the funds in a variable annuity from forfeiture in a lawsuit. This gives the investor a sense of security should an issue of liability ever occur.
• No investment limitations. Many retirement plans place limits on the amount an investor is allowed to contribute annually. Variable annuities avoid this issue altogether, allowing the investor more freedom over his or her financial future without penalty.

The Cons of Variable Annuities

This would not be a true variable annuities pros and cons discussion without touching on the negative aspects of the plan. It is important, however, for investors to be sure they understand all of the aspects of an annuity before signing the contract. Here are a few reasons why variable annuities may not be right for everyone:

• The amount of annual expenses. There are many more fees and penalties associated with variable annuities than with other types of retirement accounts, and if one is not careful in the plan they choose, these expenses can easily equal or exceed the total earnings of one year.
• Tax deferral. This is both a pro and a con. While it does allow the earnings to grow tax deferred, taxes due become due when monthly payments to the investor begins. This can sometimes exceed the total amount of interest earned, cancelling any benefit gained during the deferral period.
• Low liquidity. If an investor needs or decides to cash in a portion of their investment prior to the date or age specified in the contract, there may be quite a hefty set of penalties involved. In addition to the standard tax penalty, the financial institution itself can charge up to 10 percent in the first few years of the annuity.

Of course, the world of variable annuities is far too complex to call this an all inclusive list, but it does give some of the most common points of concern when considering this type of retirement investment plan. The best course of action is always to discuss the options, including the variable annuities pros and cons, with a trusted financial advisor.